Retail Competition in Power Distribution

Greater market competition matters for achieving greater innovation, productivity, and economic growth. Market competition is based on the principle that firms with the most efficient production and the most value for consumers should and will prevail. When firms compete with each other, consumers get the best possible prices, quantity, and quality of goods and services. Until 1991 the electricity sector was basically a monopolised sector claimed generally by the State. The Electricity Act, 2003 (EA03) was enacted with the objective to introduce competition, protect consumer interests, and provide power for all. To promote competition EA03 has laid down a roadmap for utilities to transform from vertically integrated monopolised unbundled autonomous entities for profit. The initial move led to competition in power generation, transmission and distribution. In distribution facet, distribution licensee supplies electricity and maintains the distribution system. In context of retail competition, electricity consumers have the opportunity to choose their energy provider and purchase electricity based on the price or on the source of power supplied to their home or business. Retail supply, competition is intra-type where distribution utilities compete against each other to earn the business of consumers. Strikingly, throughout much of the country, when it comes to the buying of electricity, the consumers have no choice. In fact, the spirit of competition in retail supply of electricity is still in the budding stage.

Emergence of Competition in Retail Supply

EA03 envisaged competition at the consumer end of electricity supply through open access and provision for parallel distribution licensees. Section 2(47) defines “Open Access”  as a non-discriminatory provision for the use of transmission lines or distribution system or associated facilities with such lines or system by any licensee or consumer in accordance with the regulations specified by the appropriate Commission. Section 14 opens the window for competition and more transparent distribution business. It allows multiple licensing in same distribution area and permit distribution of electricity without the license in rural area. In case distribution licensee proposes to undertake distribution of electricity for a specified area within his area of supply through another person, that person shall not be required to obtain any separate license. In a way distribution franchises is a license free activity. Section 1(27) defines a franchisee as a person authorised by a distribution licensee to distribute electricity on its behalf in a particular area within his area of supply. Section 42(1) cast a duty upon a distribution licensee to develop and maintain an efficient, coordinated and economical distribution system in his area of supply and to supply electricity in accordance with the provisions contained in the Act and under Section 43(1) such distribution licensee, shall, on an application by the owner or occupier of any premises, give supply of electricity to such premises. However  under Section 42(3) if any person, whose premises are situated within the area of supply of a distribution licensee, requires a supply of electricity from a generating company or any licensee other than such distribution licensee, such person may, by notice, require the distribution licensee for wheeling such electricity in accordance with regulations made by the State Commission and the duties of the distribution licensee with respect to such supply shall be of a common carrier providing non-discriminatory open access. Section 42(4) makes perspicuous that in case the State Commission permits a consumer or class of consumers to receive supply of electricity from a person other than the distribution licensee of his area of supply, such consumer shall be liable to pay an additional surcharge on the charges of wheeling, to meet the fixed cost of such distribution licensee arising out of his obligation to supply.

Rethinking

Open access was expected to encourage investment by private players in electricity supply. However open access has not taken off very successfully because distribution companies manage wire and retail activities conjointly. Whereas wire and power retail are two separate functions. For distribution of electricity, power is conveyed by wire through service administration lines from substations to clients including commercial enterprises, organisations, horticultural settings, and residential areas. Inter-alia technically it requires setting up of a physical network in order to wheel electricity to consumer premises. The wire business by nature is monopolistic. The competition is among a large number of monopolists and is regulated-return earning business. On the other hand, the retail power supply is the business of buying power from generators or in the spot market and reselling it to final customers. It involves customer services, billing, and collection of charges from consumers. The business mix wary distribution company of losing its retail segment to the competition.

Open access is a prerequisite for choice. Open access to the Transmission and Distribution (T&D) network is required by generators and suppliers, but not by consumers. Consumers need only to shop around for the best deal from competitive suppliers, and it should be the responsibility of the suppliers to obtain access so that the power can be transferred to consumers. Therefore, open access requests should only come from suppliers. It has to be recognised that service to consumers exercising choice is a distinct service, and not an extension of regulated supply. The term “open access” itself is a misnomer for consumer choice. The scope for introducing “open access” and retail competition is therefore vague.

The parallel licensee regime insofar as it requires distribution licensees in an area to distribute power through their own distribution system within the same area has potential adverse consequences for harmony and tariff. Each distribution licensee investing in its own network is replication of network and, economically unviable as capital investment is a pass-through expense. It would also push up costs/tariffs for the end consumers. Mumbai is the only electricity distribution area in India where two electricity Discoms operate in the common area and compete for consumers, and Mumbai consumers are exercising this choice through changeover via common distribution network or switchover via parallel distribution network. The Mumbai experience makes manifest that parallel distribution network has to be avoided.

EA03 does not have any explicit provisions to discrete power supply and operation of network as distinct businesses. Though there are enabling provisions for multiple players setting up separate networks in the same circle to supply power, there are few takers for such intra-circle competition with the exception of Mumbai distribution. Mumbai has leapfrogged the rest of the country in consumer-centricity, offering its consumers the right to choose by allowing multiple power distribution licensees to operate. Introduction of competition in distribution has improved the performance of the power sector through enhanced efficiencies, reduction of losses, better customer service, and improved management. Power companies in Mumbai have made considerable efforts to advance technology, streamline the distribution process, and to ensure 24X7 power supply to their consumers. Adoption of customer-centric technologies and innovations has kept Mumbai ahead of the curve.

EA03 provides for multiple licensees to set up their own distribution network in the same area, thus allowing for competition.  However, the electricity distribution segment has not seen much competition. Thus segregation of distribution wire business and retail supply business and allowing for multiple supply licensees in an area of supply is a must for furtherance of retail competition in power distribution.

Amelioration

There is an imperative need that the third generation reforms in the electricity sector be initiated in context to retail competition in power distribution. To this context in July 2013 Forum of Regulators prepared a study report “Introducing competition in retail electricity supply in India” based on national and international experiences for developing a roadmap for introduction of competition in the retail electricity segment of India.

On 19-12-2014, the Electricity Amendment Bill 2014 was introduced in the Lok Sabha advocating introduction of separation of wire and content of Discoms. On 22-12-2014 it was referred to Parliamentary Standing Committee on Energy. The Committee had extensive consultation with various Stakeholders and has suggested its observations, corrections and recommendations.

In June, 2015 Power Trading Chronicle (PTC) India, was assigned a project aimed at “Preparing the Indian power market for carriage and content separation through collaboration with the UK” to understand the issues and challenges to be faced in implementation of carriage and content separation. In July, 2015 Forum of Regulators (FOR) developed a report “Roll out Plan for Introduction of Competition in Retail Sale of Electricity” to evolve a model transfer scheme for separation of carriage and content. The report is highly detailed. It recommended that functional separation of the carriage and content activities in Discoms must be carried out prior to the transition so those mappings of activities are done more accurately. In November, 2015, there was an exchange visit by Indian delegation from India to the UK comprising of key stakeholders representing the Central and State policy makers in a way to understand the transition of the UK power market.

The Ministry of Power has published draft amendments to the EA03 on the 7-9-2018. The draft amendment proposes existing distribution and supply company to be unbundled into two separate companies via a transfer scheme. Section 131-A specifies that carriage and content separation can only be implemented after the transfer scheme is initiated by the State Government and this scheme shall be finalised and implemented only after seeking comments and suggestions through public hearings in the concerned license area. It introduces more than one service operator to supply power to a consumer in one distribution area. This will give consumers an option of changing their power supplying company or utility based on the efficiency of their services. As the power procured by the distribution and supply licensees need to be allocated among the subsequent supply licensees, it shall require an intermediary company. The allocation of power or contracting of power from the intermediary company by the supply licensees is central to the transfer scheme which will determine the costs of the supply licensees it will be therefore a regulated entity. Supply of electricity to consumers cannot be made unless authorised to do so by a license issued under Section 14, or is exempt under Section 13. Section 2(47) has been proposed to be amended such that the open access takes place according to the rules made under the Act rather than the regulations of the Commission. As per Section 42(1) of the draft amendment, the distribution or supply licensee has the obligation to supply 24×7 power to consumers. The proposed amendment will galvanise the commitment to reliable supply in the Act and is welcome.

Cessation

The enhanced retail competition in electrical power industry is beneficial in perspectives of both business and environment. For consumers, increased competition means more decision making power, choices, and lower costs with enhanced quality. More choices to the consumer would lead to a more cost effective power supply through competitive tariffs and also improved customer interface. A successful separation of carriage and content with dedicated roles and responsibilities of the retail supplier would lead to improvement in efficiency and quality of power and price reduction. It shall shepherd customer satisfaction and shall simulate competitive framework for delivering real value to consumers and other stakeholders. Nevertheless, there is a lot of scope for retail competition improvement in power distribution and that change for brighter future prospect is also clearly underway. Government policies are quickly adapting with evolving needs, to ensure more retail competition with relaxed entry and participation.


*Assistant Professor of Law and Dean External Relation, Gujarat National Law University & Faculty Advisor to GUVNL-GNLU Research Fellowship on Energy Law and Policy.

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